Covid-19 will trigger more downgrades, S&P global credit outlook for 2021 shows

“Even if a vaccine becomes widely available by mid-year, which we assume in our baseline, the containment of the pandemic will be very uneven worldwide,” said Alexandra Dimitrijevic, global head of research at S&P Global Ratings.

"Until then, the main risk for the first half of 2021 is that further waves of Covid-19, requiring renewed containment measures, may harm a fragile economic recovery and lead to further credit deterioration, particularly in sectors most exposed to social distancing and travel restrictions.”

S&P Global Ratings’ key forecasts for 2021 include:

• With economic momentum fading as Covid cases surge again, we are forecasting a weaker start to 2021, although our 2022-2023 GDP forecast is broadly unchanged. We expect full-year global GDP growth at 5 per cent, down 30 basis points from our previous forecasts.

• For China – first into the crisis and first out – we see GDP expanding by 7 per cent next year as acute downside risks ease and some upside emerges.

• The US and Europe are mired in a second wave of Covid-19, but extensive vaccine purchases lined up by their governments support prospects of a turnaround in the second quarter. We forecast 4.2 per cent GDP growth in the US and 4.8 per cent for the eurozone in 2021. For emerging markets, financial pressures may hamper the pace of recovery.

• After peaking at 265 per cent of global GDP at the end of 2020, global leverage is likely to ease only slightly in 2021, and mostly as a result of a rebound in global GDP.

• With vaccine availability and a rebound in the global economy, the focus in the second half of 2021 will likely turn to the gradual unwinding of extraordinary fiscal support, revealing the extent of credit losses for banks.

• Governments, meanwhile, face the difficult task of balancing the near-term risks of premature austerity with a medium-term need to put debt on a declining path.

• Our rated corporates and governments have a 36 per cent negative bias, pointing to more downgrade potential in 2021. However, our base-case economic and credit assumptions do not suggest a large second wave of changes akin to that necessary in the post-March adjustment to the Covid shock. Instead, changes will reflect the widening outlook gaps between and within sectors and regions. Those hit hard by Covid-19 – such as leisure, transportation and retail – will only recover by 2022 or later; those least affected should be back on track next year.

• Defaults will continue to rise. Even though we expect central banks to preserve very low funding costs through 2021, higher leverage and a large share of vulnerable corporates are likely to induce further defaults, resulting in the 12-month speculative-grade default rate rising to around 9 per cent in the US and 8 per cent in Europe by September 2021, versus 6.3 per cent and 4.3 per cent in September 2020.